Funding: a brief summary
CHG-MERIDIAN's funding operations are not merely an end in themselves; their purpose is to finance the Company's core business. The main priorities here are innovation, risk diversification, and a down-to-earth approach based on long-term partnership.
The system of funding used by CHG-MERIDIAN is a product of its core business, which on the one hand consists of the advice and support provided for customers in respect of technologies and services, while on the other it comprises the leasing of equipment, devices, technology, servers, and software in return for the payment of fixed regular installments. Whereas the first of these business lines is less relevant in terms of the funding needed, the second requires a large number of leases to be funded on a timely basis and at competitive rates.
The challenge here for CHG-MERIDIAN is that it needs to fund all the leases that it originates in any given year – even if their total value amounts to, say, one billion euros.
The CHG-MERIDIAN Group currently collaborates with more than 70 banks worldwide in order to obtain the funding instruments described below. CHG-MERIDIAN AG alone uses over 25 banks for this purpose (as of 2014). This broad diversification – with the ten largest banking partners together providing roughly half the total volume of funding required – has proved to be especially effective since the financial crisis of 2008 and underlines CHG-MERIDIAN's appeal as a borrower. These close relationships, many of which the Company has nurtured for several decades, benefit from the availability of extensive documentation and the proactive management of the data needed for risk evaluation purposes.
The large number of banks with which CHG-MERIDIAN collaborates demonstrates its determination not to become reliant on individual sources of funding. We are happy to work with any institution – including a customer's own bank – if that is what the client prefers. Otherwise, our prime objective is to find the best-possible solution for our customers.
The capital needed to fund the core businesses of the CHG-MERIDIAN Group and CHG-MERIDIAN AG is obtained from three sources, whose share of the total varies according to the prevailing market situation and the strategy being pursued:
Non-recourse funding ('forfaiting')
Loans (bilateral bank credit lines, syndicated loans, and promissory note loans)
Free cash flow (internally sourced funding).
The wide range of funding instruments and banking partners that CHG-MERIDIAN uses ensures that it sustains a broad-based funding model. The fact that the Company has always been able to cover all its funding needs without any difficulty – even during financial crises – shows that the combination of a conservative funding strategy and a business model that is geared to the real economy guarantees security and solid income streams for all stakeholders.
Explanation of the external funding instruments used by CHG-MERIDIAN AG:
The sale of receivables without recourse – also known as forfaiting – remains one of the principal sources of funding for leasing companies, including CHG-MERIDIAN. Some 65 percent of its total lease origination volume is funded through forfaiting. This usually involves engaging one bank to carry out each individual project.
CHG-MERIDIAN uses two types of loan facility under which its receivables from customers serve as collateral security but are not sold to the funding bank: these are credit lines granted by banks, and syndicated loans (since 2010). It has been issuing conventional unsecured promissory note loans since 2013.
Bilateral bank credit lines are never fully utilized. They function as a buffer to cope with additional volumes of business and are drawn down as and when required and depending on the terms available at the time. CHG-MERIDIAN AG successfully issued its first promissory note loan for €50 million through Hypo Landesbank Vorarlberg in 2013. Given the strong demand for these securities, which can only be purchased by institutional investors, the Company will continually increase its use of this form of funding over the coming years.
Syndicated loans have also been used for funding purposes since 2010. Packages of leases are financed by pools of loans amounting to between €30 million and €90 million, which are coordinated by the cooperative and public-sector central institutions and are then collected from cooperative banks and public-sector savings banks. These syndicated loans are a direct consequence of the excess deposits that were accumulated by cooperative and public-sector banks in the wake of the financial crisis. Since then, large amounts of surplus liquidity have been looking for safe new investment opportunities. To this end, CHG-MERIDIAN bundles together a large number of individual leases – which it has signed with substantial medium-sized companies – to form a package, which is then funded by a syndicated loan that has been coordinated by a central institution. Because of the matching maturities of the relevant loans and leases and the fact that each loan is backed by IT equipment and devices that can be sold in the event of insolvency, these syndicated loans also attract the involvement of fairly small cooperative and public-sector institutions that are obliged to pursue cautious investment policies.